Reason Behind Gold Crash Causes and Effects
When gold would have been discovered for the first time, no one would have ever imagined that it would turn out to be the basis of business and livelihood for the entire world, so much so that the economy of the world is primarily dependent on gold reserves. It is certainly the most desired and precious metal of all times.
Gold has always been a fallout option asset since the dawn of civilizations and the demand for gold has been ever increasing. Today, when the gold prices have crashed throughout the world, it has affected each and every human living on earth. The entire world is taking notice of the downing gold prices every second.
The Causes of Gold Crash
It has not been long when in January 2015, gold prices touched a high for this year and the entire world was excited about the signs of recovery, however, no one ever imagined about this upcoming gold price crisis. It all started in July 2015 when China opened its frenzied activities both at its Shanghai Futures Exchange and Shanghai Gold Exchange, in which a total of 250 tons of gold was traded.
As per the economists, the damage has already been done and there is nothing much that could be control. The only thing now possible is the precautions world economies can take for the future. Gold has already seen the ever longest phase of decline and that has been continuous.
The collapse happened due to some hedge funds that were operating out of Asian markets and China and dumped more than $2.7 billion of gold that forced the shut down. This lead to what we saw in the Chinese exchange, which was closely followed on COMEX that lead to gold thereby dropping to a record low in the last five years or so.
On the other hand, the world also saw a lot of big players and physical buyers coming out in the market and buying physical gold while taking obvious advantage of the lowering prices. It is still too early to ascertain as to who has been mainly behind the gold crash and the matter is still being investigated. It would be some bigger picture related to the gold crash that is going to effect the world economy on a macro level.
The strengthening of US Dollar
Due to the strengthening of US Dollar, a lot of money has been flowing from developing and emerging markets like South Africa and Brazil and this is causing rise in commodity prices and making overall cost of living quite expensive in these developing economies.
This has started to happen more in economies that trade in US Dollars. This has consequently resulted in a drop in the demand of commodities. The value of currencies in countries like Russia, Brazil and even Columbia has eroded by up to 30 per cent within the last one year.
Making the best out of this situation, the international investors have started dumping gold and thus excite the emerging markets, which has resulted in the bear trends being presently witnessed. What we can see is that the US Dollar is going to remain equally strong throughout 2015 and the prices of gold may recover by the end of the year, marginally.
The role of China factor
As a matter of fact, China is the fifth largest stockiest of gold in the world. However, in the recent past, China has emerged out to be the largest buyer of gold in the world. This trend of both buying and selling gold has impacted the international prices of both futures as well as physical gold. Although, it could be just an speculation, however, if few sources have to be believed, China has been buying and accumulating gold in large quantities for the last one quarter.
As a matter of fact, the PBOC (People’s Bank of China) has increased its gold reserves by a good 57 per cent compared to that in 2009. On the other hand, it is a little worrying why the other bank, Central Bank of China been buying gold reserves at a comparatively slower rate.
At the same time, the Greece coming to terms with European Union and Iran getting free from the sanctions, we can still predict a better impact on the demand for gold, to say about the next two quarters.
Inflation and Federal Rates
We all know the fact that the interest rates in United States of America have a direct impact on the inflation across the world. What we can see is that US economy shows a sign of recovery in coming future.
At the same time, the rate of interest would also be triggered with a hike in US and this would strengthen the US economy to significant level and thus put a lot of undue pressure on the prices of gold.
However, if India and China continue to buy gold with the same pace, the prices of gold are most likely to strike a balance.
The forthcoming trends for gold in India
For India, the Gold Crash is a dual-mishap situation. First, the interest rates are going high and second the rates of gold are dipping day by day. For gems and jewellery businesses in India, it is certainly not a good situation. There have been more than 27 per cent of decline in the prices of Gold in india in the last nine months. Nine months ago, gold was selling at Rs 34,000 and now we all know how much down it has gone.
The Indian Banks are certainly under pressure to reduce their NPAs. With the current situation goinng ahead, we can expect that banks would be compelled to turn most of their loan exposures into NPAs. This would in turn impact their government’s fiscal targets for the current fiscal year.
The industry problems would be aggravated with Diwali approaching and a lot of speculators have already started foreseeing a subdued demand for the pricey metal. The government is trying to make everything under control by easing gold imports and other measures; however, it is just a matter of time we witness what happens next with the ever valuable metal.
The Gold Crash may have a Silver Lining
The month of July 2015 has really been unhappy for gold lovers. However, if we believe few analysts, the decline in the prices of the yellow metal may well be a seting up of stage for significant rally of silver metal.
At the same time, silver would not be any immune to the bearish factors. There could be abundant supplies and thus the dollar may rise even more. Having said all that, silver is down even as of now and is down for more than 5 per cent since the end of last year. Oversupply of silver has been one of the core concerns.
The gold crash may have happened due to the thin market conditions and stop-loss selling. What we are witnessing for gold right now can be to an extent described as a mini ‘flash crash’.
Why could Gold Crashs be a Mirage?
The current state of gold prices across the globe is a five-year lowest one and many have already started to believe that the gold story is over by now. As a thumb rule we all know that whether it is the oil, vegetables or smart phones, the prices go down in two conditions; i.e. when the demand is low or when the supply is not enough.
As a matter of observation, the demand for the yellow metal has been low in both gold loving countries, i.e. China and India. This could be somewhat ascertained as one of the reasons for lowering of prices and the so called, ‘Gold Crash’.
With all this happening around, many investors are wondering if it is the best time to invest in Gold or they should wait any further. Well, the answers lie in simple arithemetic and macro-economics calculations. The answer to all this is quite simple. You have to ignore the signal-to-noise ratio in the prices and just calculate the mathemetics yourself.
If you have to understand the prices of gold in Mumbai, you would have to convert the international prices into rupees and add custom duty to it in order to get the prices. Having said all, this is certainly a good time to look for investments in gold, as you never know what could happen in the market, in coming future.